Microsoft has lost Munich. In a major public-sector reverse for the company in Germany, the government of the city will be replacing the Windows operating system on its 14,000 office computers with 'open source' Linux, from rival IBM.

Munich is the first large German city to make such a move. Microsoft was so con cerned by the prospect of losing Munich that chief executive Steve Ballmer met mayor Christian Ude.

Ballmer argued that a cheaper Microsoft bid, estimated at $32 million (about £23m), offered a more cost-effective solution than a partnership with IBM and the German Linux developer, SuSe.

Germany's federal and state governments as well as the local authorities and other public agencies have been studying the benefits of Linux as they attempt to reduce their dependence on a single supplier. Ironically, while the Berlin government wants to reduce its dependence on Microsoft, other European public bodies, such as Rome council, appear to be doing quite the opposite.

The German decision may say more about worries over competition policy than which technology is best.

In the end, however, the German taxpayer may be the loser. German cities are short of money, and Munich's decision to defect to IBM and Linux will, at least in the short-term, take more from the city's coffers.

The council not only accepted the more expensive of the two bids but it will also have to pay a huge extra bill for retraining all of its workforce - a bill one source estimates at a further €10 million (£7.2m).